A recent article in the monthly Connecticut Natural Gas (CNG) e-newsletter highlighted several key points in the decision making process surrounding natural gas procurement strategy. As production of domestic natural gas reaches levels unseen in U.S. history, more and more companies are realizing the impact their energy decisions have on their bottom line.
As the article points out, “Your procurement strategy is determined by your level of risk tolerance and overall energy strategy.” Risk tolerances vary greatly, with more the more conservative approach of a fixed price contract (generally for a period of about three years) contrasting with the more moderate risk of “Indexed Aggressive,” which combines a locked-in price with certain triggers to reset the contract if prices drop below a certain level. Greater risk still can be seen with index pricing and floating pricing, which constantly adjusts with the market.
To help determine your risk, ask the following questions:
What percent is energy of the cost of goods sold for our company?
Can we increase our selling prices based on energy costs?
Do we have a competitive market advantage in energy or other areas?
What are our competitors doing?
How far forward are our products sold; are our selling prices established?
At what energy price can we make money in the future?
Do we need to fix forward costs to justify a capital purchase?
If prices rise or fall 50 percent in the next twelve to twenty-four months, how will it impact our business? Is the impact proportionate or skewed?
ETTER Engineering has decades of experience working with natural gas. Through our ETTER Energy division, we can help your company navigate the complex decisions surrounding energy strategy and procurement. Give us a call today at 800-444-1962 to talk more about your energy strategy!
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